Cash-strapped states look to roll back tax credits

John Wisely

USA TODAY

June 4, 2011

Tough budget times are forcing state governments to rethink the tax breaks they grant.

Michigan last week eliminated several tax credits, including those for small donations made to universities, food banks, museums and public television. The state also capped at $25 million a year the tax incentives it gives the film industry, which has been lured to the state since 2008 by some of the more generous incentives in the nation. The changes were part of a tax overhaul that Republican Gov. Rick Snyder says will spur job growth.

The Oklahoma Legislature has set up a special committee to review tax incentives there. A report from the Oklahoma Tax Commission in October 2010 listed the cost of hundreds of credits and incentives.

"It's like a big Christmas tree," says Larkin Warner, emeritus professor of economics at Oklahoma State University, who serves on the committee. "The legislators ought to take a hard look."

Economists generally favor more uniform taxation but acknowledge that incentives can advance policy goals such as capital investment, cleaner energy use or job creation, says Dana Johnson, recently retired chief economist at Comerica Bank.

"Taxes can be used, just like direct subsidies, to (encourage) certain behavior," Johnson says. "The question you always have to ask is: Is it worth the revenue?"

Three Ohio think tanks have called for a review of tax credits to help solve that state's $8 billion budget shortfall.

"It's holding Ohio back," says Levea Brachman, executive director of the Greater Ohio Policy Center, a progressive think tank that has joined with the libertarian-leaning Buckeye Institute and the centrist Center for Community Solutions in calling for a review of the state's tax policies. Greater Ohio estimates that such tax breaks cost state government $300 million a year.

One of the breaks that Michigan eliminated had allowed taxpayers to get a 50% refund of some charitable donations when they filed their state tax returns. About 550,000 people claimed it in recent years. Without it, Michigan will save $47 million a year, according to state budget estimates.

Eliminating tax breaks isn't easy because each has a constituency, Warner says.

The Montana Legislature earlier this year voted to repeal a host of clean-energy tax credits, although Democratic Gov. Brian Schweitzer vetoed the changes last month. "To repeal these credits would be to subtract jobs in Montana's energy, construction, and agriculture sectors," Schweitzer said in his veto message.